Saturday, June 11, 2011

Hot Potatoes Coming Our Way

Greece is like really REALLY far away. So who in America cares if the Greek government fails to pay off its sovereign debt! What happens in Greece stays in Greece, right?

OK, so maybe there will be a little leakage to the rest of the European Union. Or a lot. The European Central Bank, truth be told, has an Airbus A380 full of paper not only from Greece, but from the other PIIGS as well. If they all default, the ECB becomes insolvent, as will a gazillion European banks holding the same crapola. U.S. banks have less direct exposure to European peripheral debt, so we're all good on this side of the Pond.

Or not. To the surprise of absolutely no one, the biggest U.S. banks have concocted yet another way of trying to get money for nothing. They have sold insurance to the European banks in the form of credit default swaps (CDS), which, upon a default "event," obligate the seller (read: "greedy U.S. bank") essentially to buy the bad bonds at face value from the swapholder ("clever Euro bank"). In other words, the risk of default is transferred from the bondholder to the seller of the swap. The U.S. banks are betting that they are the clever ones, that the PIIGS will be bailed out before they are ever allowed to default. The CDS, they hope, will expire worthless.

But look:

...the Greek people, never to be confused with their government, are not interested in having services curtailed, benefits trimmed, and paychecks confiscated just so that all the banks, European and American, can get paid 100 cents on the dollar. Nor are their German brethren willing to guarantee loan payments ad infinitum. A nasty "event" is increasingly likely--and may be only days way.

Financial commentator John Mauldin's weekly newsletter, posted today, is entitled "Time to Get Outraged." He reckons that the CDS exposure of U.S. banks totals $120 billion, enough to bankrupt them should dominoes start to fall. In the "event," expect TARP Two, where the banks extort more bailout money from U.S. taxpayers. As for the banks' shareholders (that's you, MainePERS), they get wiped out. It's a win-win for the banks. The Europeans come out whole, and American CEOs continue to get paid. It's a lose-lose for the rest of us.

How exposed is MainePERS stepchild Bank of America? Let me count the ways:

[from BofA's first-quarter 10Q filed with the SEC]

[update, 06-12-11:]

ZeroHedge has a provocative post up today with evidence that the beneficiaries of the Federal Reserve's latest round of quantitative easing (a.k.a. QE2) are not U.S. banks nor their domestic customers, but foreign banks:

"In summary, instead of doing everything in its power to stimulate reserve, and thus cash, accumulation at domestic (US) banks which would in turn encourage lending to US borrowers, the Fed has been conducting yet another stealthy foreign bank rescue operation, which rerouted $600 billion in capital from potential borrowers to insolvent foreign financial institutions in the past 7 months. QE2 was nothing more (or less) than another European bank rescue operation!

...if there is one definitive proof of the Fed abdicating any and all of its mandates, and merely playing the role of globofunder explicitly at the expense of US consumers and borrowers, not to mention lackey for the banking syndicate, this is it."